UOB Kay Hian (UOBKH) analyst John Cheong has upgraded his call on the technology manufacturing sector to “overweight”, and has named Frencken Group E28 and Venture Corp as his top picks given their positive outlook for sequential earnings growth.
However, the analyst says that it is “crucial to be selective” of the tech manufacturing stock picks, as many under his coverage have reported weaker-than-expected 1H2024 earnings due to weaker customer demand and slow ramp up of new plants.
Cheong has a “buy” call on Valuetronics BN2 and Aztech, and “sell” ratings on AEM Holdings AWX , Nanofilm and UMS Holdings 558 .
“A key takeaway from the 1HFY2024 results season is that each tech manufacturing company is going through their own earnings cycle and facing challenges due to issues with their major customers, especially for AEM and Nanofilm which reported losses in 1HFY2024,” the analyst notes.
He highlights the specific reasons for the underperformance of each company. AEM’s performance was impacted by Intel’s weak personal computer (PC) demand and inability to gain traction in the AI-related sector, which has impacted its financial performance and results guidance.
Recent negative developments from Intel such as management departure and delay in completion of new plants suggest more problems ahead, he adds.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
The analyst notes that for Nanofilm, it is encountering weak demand for its industrial equipment business unit due to a soft market for capex spending.
On the other hand, UMS did not fare too badly despite the earnings miss, reporting a decent 2QFY2023 earnings of $9.3 million (-20% y-o-y/-5% q-o-q), notes Cheong.
UMS is overcoming the issue of reduced market share from its existing customer Applied Materials as well as slower-than-expected ramp-up of new customer Lam Research, the analyst says.
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
“Given the huge disparity in financial performance, it is crucial to be selective,” says Cheong.
He likes Frencken for its outlook has turned more bullish with expectation of better revenue in 2H2024 vs 1H2024, mainly driven by the semiconductor segment. Frencken will also recognise delayed orders from in 3Q2024, indicating a strong q-o-q earnings growth, and margins are also expected to increase due to higher utilisation.
He also likes Venture as it has maintained its expectation that its revenue will be stronger in 2H2024 compared with 1H2024. The group has remained proactive in pursuing multiple initiatives to further improve its performance in 2H2024, such as the onboarding of new customers, new product introduction activities and supporting customers with geopolitical risk mitigation strategies.
Cheong’s target prices for each stock are as follows: “buy” for Frencken with a target price of $1.74; “buy” for Venture with a target price of $16.17; “buy” for Valuetronics with a target price of 78 cents; “buy” for Aztech with a target price of $1.25; “sell” for AEM Holdings with a target price of $1.04; “sell” for Nanofilm with a target price of 50 cents; “sell” for UMS Holdings with a target price of 90 cents.
